Insurers and reinsurers within Malaysia have adequate capacity for flood risk, despite low penetration in the country, says a new report.
The report, The Malaysian Insurance Highlights, says that while 5m of the country’s 32.3m population live in flood-prone areas, fewer than 25% of homeowners and 5% of vehicles are insured against this type of event. However, Faber Consulting, which authored the report, says that insurers in the nation are adequately capitalised to shoulder the risk.
Zainudin Ishak, president and CEO of Malaysian Re, for whom the report was written, said: “The cost for flood insurance is rather nominal. The cover is available as an extension to the standard fire police and costs about 0.086% of the sum-insured. Still, in the personal lines, the pricing of the risk is perceived as high and is often only purchased in flood prone regions or following recent events.”
He added: “Mostly homeowners are insured as the banks arrange the cover as part of the mortgage. The lower-income segment of the population, who run a high flood exposure, rely on the government in case of a loss. In the recent flood it supported the people affected with a financial contribution of $336m. Currently, we are working with Bank Negara and Malaysia’s National Disaster Management Agency (NDMA) to develop a solution that ties together those who can afford to insure with those who cannot.”
According to Malaysian Re, demand for flood cover in the country is influenced by the government’s support of the country’s low-income segment for the loss caused by a disaster. Currently, the government assumes the role of an insurer of last resort.
Although the Malaysian government budgets for these kinds of events, there is a high consensus that historically its bail-out measures have been insufficient to compensate the lower-income sections for its losses. Malaysia’s large corporations and public institutions, by contrast, are seen to recognize the risk, while SMEs and consumers tend to underestimate it.
Historically Malaysia has experienced adverse flood events once every three years. From 1998 – 2021, around 14 major flood events took place in Malaysia. Apart from the December 2021 event, a flood event in 2014, affecting the East Coast region had been the worst hydrological disaster. The recent great flood in December 2021 was by far the largest and costliest event that the country has experienced, caused by more than 36 hours of continuous rain and extending across eight Malaysian States or 33 districts and displacing more than 100,000 people. More than 50 died.
Recent events, said Malaysian Re, will have an immediate effect on pricing in the market, despite it being stable or even declining over the last three years. It says that demand for residential and commercial property, household content, and motor policies is set to increase.
Despite this, reinsurance pricing is expected to increase substantially in the coming renewals. Insurers are expected to review their reinsurance structures to ensure they have sufficient coverages in place. Besides, understanding of flood risk is changing. Previously, insurers had considered Malaysia not as a part of the Pacific «Ring of Fire» with its high exposure to natural catastrophes. Insurers are adapting that view to the new realities, particularly re-evaluating how to assess its flood risk.
There is a need, overall, for a conversation about better managing the country’s flood risk, says Malaysian Re.
It said in a statement that any such solution will bring together the sector, the regulator, the NDMA, and the government.
It added: “While previously, the focus had been on developing a coverage which foremost addressed the exposure of the lower-income segments of Malaysia’s population, the current wholesome solutions aim to provide faster protection to consumers and encompass all parts of society or policyholders.”